Business ethics and OECD principles: What can be done to avoid another crisis?

It is a great pleasure to be here with you to open this year’s European Business Ethics Forum. I am very happy to be part of these discussions. Thank you very much for this invitation.

The current global economic crisis is costing the world trillions of dollars, a protracted recession, millions of lost jobs, a huge loss of confidence in financial markets and a reversal in our efforts to curve global poverty. It is the result of the combination of several failures. A failure of business ethics is one of them; one that lies at the epicenter of this financial and economic earthquake.

In the coming months, the rules of the global financial and economic system will be rewritten. The incentives to proper behavior have to be included in those new rules. A new balance between governments and markets will also be established. The crisis will give us the opportunity to build the foundations of a new business culture; more ethical and responsible.

Business ethics reflect the strength of a market economy. They are an important indicator of its general health. In a world where some corporations rival the power of states, where the excesses of a handful of banks can paralise the world economy, it is fundamental to have a solid, transparent and updated set of rules that guarantee that business activities can produce their best fruits, avoiding the excesses of market capitalism.

One of the main lessons of this crisis is that companies and markets can’t rule themselves. Financial innovation sacrificed business ethics for the sake of extraordinary profit.

The reconfiguration of the international financial system must guarantee transparent managerial incentive schemes. As Joseph Stiglitz recently pointed out, the new framework must get rid of any “perverse encouragement for bad accounting, myopic behaviour and excessive risk taking”.

Business ethics derive from transparency, objectivity, reliability, honesty and prudence. These values allow the financial sector to generate the key asset to conduct business and discharge its fiduciary responsibility: trust.

Trust is the basic element for the well functioning of markets and societies. Trust is what makes it possible for a household to place its savings in a bank. It allows businesses to engage in financial transactions to produce, to employ, to grow. And we have either lost it or at least misplaced it.

To restore this trust we need to build a more robust regulatory framework. We need to prove that globalisation is reliable. And the only way to do so is through an enhanced multilateral co-operation. The global economy is too integrated to function without sound international rules and regulators.

It is vital to engage emerging economies in the creation a new set of high ethical standards, sharing with them not only rights but also responsibilities.

At OECD we have been working for decades in building sound, reliable and multilaterally-agreed principles and standards for business ethics. And we are widening their scope to more and more emerging and developing economies.

Let me give you some examples.

The OECD’s Instruments to Enhance Business Ethics

Our OECD Guidelines for Multinational Enterprises are the sole instrument covering all areas of business ethics. They have been developed multilaterally and agreed by governments. They include general principles but also detailed recommendations such as promoting compliance with laws; protecting consumer interests; respecting human rights; caring about employment, industrial relations; and protecting the environment.

The track record of the Guidelines is excellent. So far, 41 governments, including 11 non-OECD countries, have signed the Guidelines. The Guidelines have provided the basis for the co-operation between China and the OECD on encouraging responsible business conduct. In this context, the new OECD Investment Policy Review of China has just been published.

Since 2000, some 135 complaints have been considered by the National Contact Points responsible for their implementation. Half of them have been resolved.

Around 40% of multinational enterprises have used the Guidelines as a model to develop their own codes of conduct. The Guidelines are also being used by rating agencies and stock exchanges. For example, the Thai Stock Exchange and the Shenzhen Stock Exchange have referred to them while developing their own corporate responsibility recommendations to companies.

Another important multilateral instrument is the OECD Principles of Corporate Governance. The Principles are part of the Financial Stability Forum’s core standards for sound financial markets. The majority of national corporate governance is based on the OECD principles.

While the OECD Principles of Corporate Governance primarily address the structure and quality of the regulatory system, they also highlight the importance of high ethical standards when conducting business and in interactions with stakeholders.

The Principles underline the key role of the Board of Directors in establishing the ethical standards of a company. The OECD Principles make it very clear that a viable framework for ethical standards goes beyond mere compliance with the law and that company codes of conduct can be an effective way to make the “tone at the top” known.

While high ethical standards obviously are desirable in their own right, the OECD Principles also make an explicit link to corporate performance. Ethics generate profits.

Although it is true that many Stock Exchanges’ regulators and market participants have used them to develop their national codes, the current crisis shows that there were implementation problems ─ such as risk management and remuneration. Therefore we are reviewing these areas of the Principles.

The OECD Convention on Combating Bribery has also been a strong contributor to improve business ethics globally. The Convention makes it a crime to bribe a foreign public official in exchange for obtaining, or retaining, international business. This peer-driven monitoring mechanism has acquired the status of a “gold standard” according to Transparency International.

Over the past decade, the Convention has resulted in more than 150 investigations and over 60 individuals and Companies have been sanctioned for committing foreign bribery and related offenses. A number of these investigations have been echoed in the media. All this would not have been possible ten years ago, before the Convention entered into force. However, the Working Group on bribery would like to see more investigations and prosecutions of foreign bribery in State parties and there is still a long way to go to achieve market environment free of corruption.

We celebrated the 10th anniversary of the OECD Anti Bribery Convention in 2007, when countries agreed to launch a comprehensive review of the mechanism; to be completed in 2009.

In addition, last October, the OECD adopted a set of Principles for Enhancing Integrity in Public Procurement. These Principles contain a set of procurement policies and practices that have proved effective around the world in preventing risks to integrity in the entire public procurement cycle.

We are working very hard to implement, develop and expand the outreach of these multilateral instruments. 2009 will be a year of great opportunity to reconfigure and strengthen the business ethics environment and OECD will move forward strongly in various tracks.

In parallel to the actions included in the Strategic Response we will strengthen our efforts to:

1. Implement the OECD Principles on Corporate Governance in the financial sector, where it has become imperative to restore confidence. Following the G20 Summit in Washington, the OECD member countries formulated an action plan to address weaknesses in corporate governance related to the financial crisis.

The OECD will work closely with FSF to facilitate the implementation of the OECD Principles, with special attention to four areas of immediate importance to the financial crisis: Board practices; Risk management; Remuneration; and Shareholder rights.

There is an obvious scope to improve not only rules and regulations but also ethical standards. As we take our work forward, we will give great importance to consultations with the private sector, stakeholders and organisations. During this process, I look forward to the input from the European Business Ethics Forum.

2) We will also upgrade the OECD Guidelines for Multinational Enterprises. In 2010 we will celebrate the 10th anniversary of the revised OECD Guidelines for Multinational Enterprises. We will use the opportunity to review them and, if necessary, to update them in the aftermath of the crisis. We would be delighted to involve and invite interested enterprises present today.

We will provide practical guidance to companies. We will help them turn broad universal principles of ethical conduct into local practices, appropriate management and compliance systems, and interpret the Guidelines in concrete situations. And we have also launched a new round of discussions on the application of these Guidelines to the financial sector.

3) We will provide strengthened peer review mechanisms in key areas like open and responsible investment, anti-corruption, competition or other aspects of responsible business conduct. We have a long tradition of using peer reviews. We will strengthen the approach and extend its application to more relevant sectors and countries.

4) And we will strengthen our collaboration with other international organisations to help build a new regulatory framework for a more reliable and inclusive global economy. We are already working with the G20 to help draft their Action Plan in the area of “Reinforcing International Cooperation and Promoting Integrity in Financial Markets” and we are also preparing to support their work in other areas.

The Italian presidency of the G8 is promoting an initiative to establish a worldwide “legal standard” of rules governing the future of globalization. Mr. Giulio Tremonti, Italy’s Finance Minister, has stressed that concrete reform proposals could draw from the extensive work already carried out by international organisations, with the OECD in the front line.

Building the new rules for the post-crisis global economy is a task that demands a collective response. We will only build a solid and reliable financial and economic framework if we work in concert, including all major players. This is why multilateral organisations have acquired a renewed significance.

We are facing a systemic failure. This global crisis was not caused by any external shock like a terrorist attack or the manipulation of oil prices by a group of countries. It was created by the system itself; by the system which we created; and by a toxic combination of unethical behavior by companies and a faulty regulation and supervision of their activities. The crisis also exposed the deficiencies of international institutions. We must build a better system so that this does not happen again.

Decision-makers cannot afford to fail their people so badly again. The cost of bailout and fiscal packages is going to linger on for generations. Our societies are now so disgusted with business practices that there is a growing call for stronger than ever regulation. And we run the risk of returning to selfish nationalism or cumbersome over-regulation.

Business ethics should be at the center of any new road-map for the global economy. Markets should not only be more stable, but morally acceptable as well. It is time to reunite ethics and economics. This is what we are trying to do at OECD. But we won’t be able to do it without your contribution.